'Neither SMEs nor retail clients can borrow at current rates'

Q&A/ Sanjay Nayar

It's a difficult time for banks both at home and abroad. But Sanjay Nayar, Chief Executive Officer, Citi India, shrugs off Citigroup's problems in the US saying they haven't really impacted the Indian operations. Nayar admits there have been a few problems with the consumer finance business but tells Shobhana Subramanian and Sidhartha that Citi's India operations are well-positioned to see double digit growth over the next few years.

How do you read the capital market space?

There is a bit of a slowdown and while there is a strong pipeline of fund raising "" both equity and debt "" it's not happening because of the slowdown, both locally and internationally. Essentially, there is a lack of liquidity in the market and while investors want better pricing, companies don't want to pay that much, so there's a bit of a stalemate. Big deals particularly, may not happen in a hurry because there isn't enough of an appetite for them, but it should get better after the summer.

You've seen some problems in the consumer finance space?

Citifinancial has a strong business model and today we have 450 branches and a big balance sheet. The book "" which is sizeable at over $2.5 bn "" is not really doing too well today. But the real issue is that a lot of new players came in without understanding the risks, and as a result, the same customers were overleveraged. So, all of us are now taking a knock. But we're putting it right and by the third quarter, we would have boxed in the problem.The losses are more than we expected in terms of delinquency norms but, given the revenue base, it's not such a big deal. We've taken action in terms of collection, we're getting away from some locations and some sub-prime segments and we are looking at closing between 40-60 branches, which we can relocate and set up later. We need to reposition the franchise a little differently.

Are you looking at a joint venture with Reliance Retail?

Yes, we are looking at doing something together "" trying to work out a consumer finance and cards proposition. Citibank will share its knowledge of products and technology and they will bring to the table the brick and mortar distribution. It's still in the discussion stage.

How do you see the retail credit market growing this year?

It has certainly slowed down from the days of 30-40 per cent growth, but I think there is still demand. However, banks are tightening up for a couple of reasons, the credit environment is not as wholesome as it was, and the credit assessment system is nascent. Moreover, everyone needs capital. So,I would think there's more a slowing down of giving credit at easy rates, rather than a slowing down of demand.

Which way do you think interest rates are headed?

My sense is that if the credit growth continues to be in the 20-30 per cent range, interest rates will stay high and could edge up a little because there isn't sufficient term liquidity with banks. But if credit growth slows down, which is happening, and grows at sub-20 per cent levels, rates will stabilise at current levels. There is not enough long-term liquidity, so money could be tight because government borrowings are still high, there's a lot of SLR. If the ECB window is opened up, then the pressure may ease somewhat.

Will customers borrow at these rates?

It would depend on each bank's strategy and at what rates they choose to lend. But I think retail clients won't find it easy to absorb these rates and neither will SMEs. Only the big companies will absorb it.

Have you seen companies hesitate to borrow because they fear a slowdown?

Some of the medium-sized companies are deferring their decision to borrow long-term money. These would be in industries like chemicals, auto ancillaries. They don't want to take three-year loans so they're asking for bridge loans till rates come down. Now it's up to the banks to decide whether they want to lend to them but some companies are cautious. In some cases, the issue is the high cost of credit, for others it relates to a demand slowdown.

Some of your peers are seeing problems in the SME space. How has your bank been doing?

We have a fairly large SME book, it would amount to about 10-15 per cent of our assets. Nevertheless, we continue to expand and we're acquiring clients in addition to the 5,500 that we have. We are able to usually become the sole banker or one of two bankers to a client and we then bring to them a host of services "" whether it's credit, cash management or forex service, all possible elements. So it's a differentiated business model but a robust one because we're able to track the cash flows, get a good understanding of how things are moving and get early signals. This segment has done well for us. Credit quality could get tricky but we haven't seen any signs of that "" maybe our risk management has been better. But by definition, when you have inflation of this kind, a shortage of capital and rates go up, SMEs will get impacted. I'm sure we'll see some trouble too because credit quality will deteriorate. It'll be unreal otherwise.

What kind of growth is Citibank looking at over the next few years?

After a point it becomes difficult to gain too much market share. Also, we have a higher cost of funds because we have only 42 branches but nevertheless we will certainly grow the balance sheet. But our non-fund based businesses will perhaps grow faster and so, we hope to have solid double-digit growth over the next three to five years. We can't replicate what we did in the last three years, but the demographics are still very attractive which we should capitalise on and we're building distribution big time. We want to be a large universal bank and we're targeting customers across segments, whether middle-income or high net worth, and both large and small companies.

Is it frustrating not to be able to grow inorganically?

Not really, you can grow organically and grow fast.

How do you read the derivatives problem?

The problems arise when there are no underlying contracts; some companies thought it was an easy way to make money but I think they are in a minority. We have seen extreme currency movements which were not considered, so there are mark-to-market losses which could be a significant part of their net worth or sales. When customers were making profits, there was no noise. So, I don't think it's a big problem. We have clients who are out of the money, but no defaults.